Good morning, everyone, and thank you for waiting. Welcome to Odontoprev’s First Quarter Results Conference Call. With us, we have Mr. Mauro Figueiredo, CEO, Luis Blanco, CFO, and Mr. Roberto Borges Pacheco, Investors Relations Officer. This event is being recorded and all participants will be in the listen-only mode during the company’s presentation. After OdontoPrev’s remarks, there will be a question-and-answer session. At that time further instructions will be given. [Operator Instructions]

This event is also being broadcast live via webcast, and may be accessed through Odontoprev’s website at www.odontoprev.com.br/ir where the presentation is also available. Participants may view the slides in any order they wish. The replay will be available shortly after the event is concluded. Those following the presentation via the webcast may post their questions in advance on our website. They will be answered during the Q&A session.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Odontoprev’s management and on information currently available to the company. They involve risks and uncertainties because they relate to future events, and therefore, depend on circumstances that may or may not occur. Investors and analysts should understand that conditions related to macroeconomic conditions, industry, and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

Now I’ll turn the conference over to Mr. Roberto Borges Pacheco, IR Officer of Odontoprev. Mr. Pacheco, you may begin your presentation.

Roberto Borges Pacheco

Hello, good morning, everyone. We would like to thank you all for participating in this conference call to discuss Odontoprev’s results in the first quarter. Let’s get started. We begin the presentation on slide number three, where we see the top-line growth. In both the quarter, and over the last 12 months, revenues came up by 9%, reaching BRL330 million in the quarter, and BRL1.3 billion in the last 12 months. It’s worth mentioning that in this quarter, revenues from the Brasildental GEV represented BRL6 million.

Next slide, slide number four, we demonstrate the growth of the average ticket over the recent quarters. In the last quarter, the average ticket reached BRL17.95. Excluding the Brasildental portfolio in the corresponding reimbursement of their cost of services in G&A, the average ticket would have been BRL18.62, 11.8% higher than Q1 2015. As we can see on the next slide, slide number five, Odontoprev has approximately 6.4 million members, with 51,000 net additions over the last 12 months.

On the next slide, slide number six, we highlight the strong expansion of SMEs and individual plans revenues. The SME revenues came up by 16%, while individual segment revenues increased by 47% year-over-year. It is worth mentioning that the individual plans revenues already represent the second largest portion of our total portfolio. Together, SME and individual plans came from 24% of revenues in Q1 2015 to 29% now.

Our next slide, slide number seven, we see that the average ticket increased in all three segments in the year-over-year comparison, especially the 10% expansion of the individual plans growing at double-digit rates for five consecutive quarters. The main reasons for that were number one, the price readjustments and price updates of all retail products. Number two, a better performance of the bank channels, and number three, the introduction of new and premium products of a higher average ticket.

As we summarize in our next slide, slide number eight, we highlight Odontoprev’s unique strategic positioning demonstrated by the leadership position in the corporate segment and the development and expansion of individual plans and the SME segments of higher average ticket, lower number of competitors, and higher contribution margins. On our next slide, slide number nine, we demonstrate the evolution of both SMEs and individual plans that represented 23% of members and already 29% of total revenues in Q1.

Our next slide is slide number 10. We demonstrated membership evolution of SMEs and the individual plans, which doubled the number of members since 2011 with annual growth rate of 20% in both cases. Now let’s take a moment to analyze the SME segment and later on the individual plans sector it’s starting at the next slide, slide 11. SME is already counted with the bank channels as the number one growth driver that already represents the vast majority of this portfolio. In the quarter, the SME portfolio reached 857,000 lives, 8% higher than Q1 2015. The Bradesco Dental had an even better growth of 9%, coming from 652,000 lives in Q1 2015 to 713,000 lives in Q1 2016.

Now, let’s talk about the second fast growing product, individual plans. As we demonstrate on the next slide, slide 12, this portfolio delivered net additions of 157,000 new lives over the last 12 months, reaching a total of 586,000 members in Q1. The bank channels reached 46% of the individual plans segment portfolio versus 30% one year ago. It is also worth mentioning that the Bradesco channel grew 93% year-over-year, coming from 128,000 to 247,000 lives in this quarter. The Brasildental JOINT VENTURE started its operation last year in 2015, and already represents 4% of the individual plan portfolio.

Now let’s analyze the Brasildental portfolio on slide number 13. That reached 327,000 lives with net additions of 44,000 lives over the last 12 months. This portfolio is still basically corporate with a great potential, given Bank of Brasil cited quality distribution channels. On the next slide, slide number 14, we see that the dental care ratio was 45.2% in the quarter, 1.8% basis points higher than the first quarter of 2015 due to beneficiaries higher utilization of our services, and adjustments in the contracts of our service providers. We also demonstrated the DLR performance segment as we can see on the next slide, slide 15. In Q1, the DLR increased in corporate and SME. In individuals, the DLR had an important improvement, mainly due to the pricing power, higher contribution of the bank channels, and the launch of new products of higher average ticket.

The next slide, slide 16, we see that in Q1, selling expenses improved a lot in all three segments, especially on the individuals due to the growing participation of the bank channels with lower distribution fees. As we can see on the next slide, slide number 17, G&A represented 13.8% of revenues in the quarter, mainly due to personnel expenses. It is worth mentioning that the number of Odontoprev employees remains literally flat since 2011, showing important and continuous gains of productivity.

Our next slide, slide 18, demonstrates the evolution of cash generation, as measured by EBITDA. In the last 12 months, the adjusted EBITDA reached BRL322 million, 2.7% higher than the same period of the last year. In the quarter, the adjusted EBITDA reached BRL87 million, with a margin of 26.6%. The next slide, slide number 19, we see that net income reached BRL69 million in Q1, similar to Q1 2015. Over the last 12 months, the net income reached BRL222 million, 9% higher year-over-year, with the analyzed ROE reaching 31%.

Now, let’s take a moment to analyze the cash flow generation of Odontoprev, starting on the next slide. As you know, the company remains with zero debt. The next slide, slide number 20, we highlight the cash flow evolution in the quarter. As we can see, during this period, there has been a cash generation of BRL90 million, equivalent to 27% of revenues. The company’s net cash position reached a record level of BRL409 million, as we can see on slide 21.

Our Board of Directors approved yesterday, quarter dividends in the amount of BRL33.1 million moving up the total shareholder remuneration over the last 12 months, to BRL208 million. Our next slide 22, our last one, we demonstrated company’s shareholder structure, especially in the hands of foreign investors, which holds the biggest portion of the free float. Last but not least, regarding yesterday’s material facts, and before starting our Q&A session, I’d like to invite Mauro, our CEO, for his comments. Mauro, please.

Mauro Figueiredo

Thank you, Borges. Good morning everyone. It has been announced there is a resignation of the present CEO, who is speaking now. And the new CEO will take charge from June 1, and I would like to tell you that, that change has been planned and implemented very carefully. And I America very happy that Rodrigo Bacellar, who is the new CEO, will bring all his previous experiences in different sectors.

At present, he is CEO of Orizon, a company with a strong track record of applying new technologies and innovation, to create value in the into trade value chain of healthcare. And I am confident that Rodrigo will not only continue the implementation of our successful strategic plan, but also he will bring his personal contribution to innovation, to bring the Novo initiatives. So I will be in charge of Odontoprev until the end of May.

We are already working together. We have a very strong agenda with investors, with sell-side, with our main stakeholders. So we have been working, I know Rodrigo for years now, and I was particularly happy when I was known that he is next. So we are now in the transition, and during the next few weeks, we are going to see us around and we will happy to share with you other comments.

Roberto Borges Pacheco

Thank you, Mauro. Well, we thank you all for your time and interest in Odontoprev at the time that we celebrate 10 years of our listing at the Novo Mercado, our IPO of 2006. Thank you all, again, and let's start now the Q&A session.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer Session. [Operator Instructions] Our first question comes from Rodrigo Gastim, BTG Pactual.

Rodrigo Gastim

Two questions from my side today. The first one, I was just trying to understand, going forward, given the very poor outlook for labor market conditions, how do you expect the growth in the corporate segment might behave? Are you expecting negative net adds for the next quarters? Or the internal initiatives that your guys are trying to put inside the companies might bring a relief in the corporate segment? And the second question is on the dental loss ratio, specifically in the SME segment, right? I was just looking for more details on the sharp deterioration seen in the first quarter, and trying to understand if whether the levels shown last year was too low, or if the levels shown this year might be the standard for the SME segment going forward.

Mauro Figueiredo

I think one of the things that is very important to understand now, the strategic position of Odontoprev now, it's not anymore corporate business story. So it's completely full range segment story. And of course, as you mentioned, the macro conditions will affect, and is affecting more the corporate segment, as you see in the first quarter. But along with that, you see a very robust increase of revenues and lives in non corporate segments. So you need to consider each segment separately in order to understand what's going on.

As we have been saying to the market, those non corporate segments has been probably favored by the drivers, because now we are giving an option for those used to use to pay out of pocket. An alternative that's really less expensive, and with better, higher quality than the ones that are used today. And so, the corporate segment is going to be more volatile. That's what we have been saying. So we don't anticipate any deterioration more than what we saw last year, which was more or less neutral effect. Small net adds or small net losses, that's going to be what you are going to see throughout the year. This first quarter has been more intense because some large accounts has been lost, but that's not revealing a trend what is going to see for the following quarters.

We remain with the same perspective. You're going to see this volatility; it's important to mention that those losses have more to do with unemployment; layoffs are not being replaced, as opposed to losses of contracts. We have acquiring new contracts as we have been losing some contracts. The balance between lost and new contracts is more or less neutral. So the entire effect that you are seeing in the corporate segment is to do with unemployment. And you need to look at the what the numbers are telling you. So we are talking about 100,000 lives in round numbers.

And of course, you follow 5 million lives. This is really very small. So what's that's to repeat what I just said, you are going to see more volatility, but Odontoprev has been very disciplined regarding pricing, and we will continue to do that. Of course, we are sensible enough to be more flexible with some strategic contracts. But we never enter in a price war, and that's not part of our intention to do that. So you are going to see volatility, more or less, it's going to be neutral effect. Dental loss ratio has been a bit pressured, but for us this is in a way good news.

Of course, this pressure is a short term result, but what we see as positive, it's because we are at the beginning of a structural change. If you consider the behavior of beneficiaries and the dentists, this is very important to realize. The beneficiaries is realizing this for them, it's very good option to have a dental plans as opposed to pay it out of pocket. We're just the beginning of that process. Let's remember the dental plans are present in only 11% of other corporations. It's completely different from what you see from the medical plans.

There are more than two times more penetrated. The dentist themselves, also, they are at the beginning stage of this transition from being a self-employed professional to be a professional that is more dedicated to dental plans. They're realizing probably that's a very good option for them as well. And today, because of the crisis, people, of course, are more limited regarding their budget to spend outside dental plan. So those that carry a dental plan are using the most they can. So for us, this is different behavior. So when you look at the procedure that's being performed, we see an enrichment of procedures. So more and more they are using more complex procedure inside the dental plan.

You may consider this bad news for us, it's extremely good news, because we are in the business of providing excellent services and our providers are prepared to do that. As the dentists are beginning to do that, they are beginning to make a transition also of the beneficiary side. We are not concerned about dental loss ratio for those segments, Particular for non-corporate segments because they are self-adjusted in time. Both SMEs, and the individuals, we treat them as a pool of lives for us. If you look at veneers if you would consider our one, very big, 805,000 lives company. And the need for us to readjustment is pretty much in-line with inflation, or below the general inflation. So it's self-adjusted in time.

So with just what you have seen, it's a temporary increase in the dental loss rate because, remember, dental loss is a ratio of dental costs then. And the premiums, they're ravenous. So it's a self-adjustment. The same happens for individuals. The fact that you are seeing is because of the rapid increase in the number of lives and because there is a grace period, so that naturally drops the dental loss ratio.

And the more they grow, the more you are going to see that effect. And in corporate segment, of course, because of all the conditions [indiscernible] the cost increase but we are managing to do that, and that's the reason why. Despite the number of losses that we report, you see the low digit revenue increase. That's very important to understand. So we have revenue increase for all three segments. So that is for dental loss ratio for SMEs, and I'll take the opportunity to talk all segments.

Rodrigo Gastim

That's perfect. Thanks for the answers.

Operator

Our next question is comes from [indiscernible]

Unidentified Analyst

Good morning, everyone. My first question is related to the [indiscernible] provision for [dobbed for accounts]. Could you please comment more on that? And also, if possible, give us a breakdown of which segments of the business this line is pressuring more. If it's in the SME or corporate, or even, I suppose, individuals, and what will be the action plan of the Company to cover this pressure? That's my first question.

Unidentified Company Representative

[indiscernible] CFO, Luis

Luis Blanco

Hi, Bruno, it's Luis speaking, regarding the increase of the PDD of this quarter, I would say that half of this increase comes from the corporate segment and the other half comes from the individual segments. In the corporate, we see that some companies are using suppliers as a source of cash flow. So they are postponement the payments and we have some past-due payments for our customers. We are not worried on that.

We are talking to our corporate customers and I think in the second quarter, we will move back. Regarding the other half, the half that comes from the individuals, we made on this quarter a huge transformation in how we operate internally the individual segments. And we face some issues on this movement. And that's why we have some past due that comes from these individual segments. In my opinion, we are going to see that continuing the same trend on the second quarter but from the second semester ahead from the third quarter, I think we are going to move back to the old levels of delinquency.

I would say that this increase is temporary in which segments. Just remember, as we are moving ahead in the individual segments, as the individual as a whole have a delinquency rate that is more than the corporate SMEs. The trend is going forward as the individuals are increasing on the revenue side. So in the general picture, is that what happened on the delinquency on this quarter.

Unidentified Analyst

Okay. Thanks Luis. My second question would be in related to the clause that Bradesco Dental has been the clause of the INSS, the social security tax, over the dentists. Do you have any type of expectation for the time of this clause? And do you think that this decision will trigger a positive further decision for Odontoprev cause, which is greater than days of Bradesco Dental. Do you believe this could be a positive indication for us?

Mauro Figueiredo

That is a very interesting good news that we received this week, as we have been formed the mark for a long time. And it’s important to understand that there are two process one is older, that one of Bradesco Dental that now reaches the very, very end of its stages, and what we got. And we communicate to the market with the approval by one of the Supreme Court’s, that’s one, we believe, the final stage. They approved unanimously the demand or Odontoprev. And we need to wait now to see if the federal authorities will try to protest to the Supreme Court, the federal Supreme Court. But we don’t believe so because in the previous process of Bradesco Health, they decide not to do so. And that’s exactly the same thesis and also the same legal advisors.

So based on a very recent event with Bradesco Health, was the end of last year, end of April 15, the federal authorities decide not to go to the Supreme Court, and they accept the judgment of that court FGJ. So we expect to they do the same with us. If that is the case, we may see the final approve in few months. If they decide to contest to the federal Supreme Court, then we need to wait a little longer, but not that long. Because there is no Constitutional matter involved in that issue that would give the grounds for them to appeal to the federal Supreme Court.

So they follow the same track, we are going to see something very soon, the end of this. Which is only one of the process Bradesco Dental takes into consideration INSS, and view the date of the merger. So once you meet 2010. There is another, and that we’ll bring to our net income, the amount that has been communicate around BRL41.5 million this year, that’s what we are expecting.

The second process, it’s more important, brings more than BRL200 million and involves everything from 2010 until present. And that will not only have an impact of this BRL200 million, but also what can be done from now on. So and that, as you know, will have a very nice impact on our margins. But that second process is one or two steps behind the Bradesco Dental process. No one will be able to tell you how long it’s going to take, but the more those process with the same thesis, they reach that position, they are now, for the second time, have been approved by different groups of FGJ, and both by unanimous decision.

So, that is very important. And the fact that the federal authorities decide not to appeal to the federal Supreme Court, may indicate that may have established a new understanding for that matters. We don’t know yet, but that we are going to see, based on what they decide to do now with this process. What, just saying, that you may create an environment that can speed some work those processes.

For us, very good news. We are looking forward for the second process. But I mentioned what we can predict with some precisions that this year, we are going to see in our net income, those BRL41.5 million from the first process, and let’s see what’s going on with the second, which carries the same thesis, the same legal advisors, but just one, two steps behind the present status of Bradesco Dental process.

Unidentified Analyst

Thanks Mauro for the clear. Just a follow-up. Once the Bradesco Dental clause is finally adjudged and the final ruling is announced, it is not automatic that Odontoprev will win this clause, too. I mean, there is a great possibility that the decision will be the same, but there is no automatic clause for a single case, right?

Mauro Figueiredo

Yes, this term is correct.

Unidentified Analyst

Okay. Good.

Mauro Figueiredo

And each process is judged independently.

Unidentified Analyst

Okay. Thanks. And just a final follow-up from the first question you received regarding portfolio. If I understood correctly, you said that you expect net additions, small net additions or net loss for the year. Is this for the corporate segment, or is this for the whole base of the beneficiaries?

Mauro Figueiredo

No for the corporate segment. For both individual and SMEs, we expect to keep the same pace as we have been showing. Pacheco just showed now is a very nice figure, and they converge to the same figure, coincidentally, 20% CAGR since 2011. We have no reason not to believe that's going to keep that. And remember, we have very new things coming up. Bradesco Dental is the more the time goes, the more they get experience, they get knowledgeable about their product. People are much more involved now, the network of branches, other people working together.

So there's something yet to come, is coming. So even without the very strong yet performance of Bradesco Dental, you are seeing those 20% CAGR. So if you add on that, what we predict with the potential of a dividend, along with the potential of new distribution channels, particularly the digital channel that is coming. So more and more we're seeing the expansion of our ecommerce platform.

We are expanding our platform. Bradesco Insurance is launching a new platform, probably this quarter, they don't have this confirmed yet, but that is what we are expecting. So we have new things on the [roll] that can really show very nice results. But even without those, we are showing that kind of growth. So when I mentioned neutral growth, just talking about the corporate segment. For SMEs and for individuals, you are going to see the same pace, if not more throughout the year.

Roberto Borges Pacheco

Bruno, just to add on Mauro comments. This is not a promise, this is reality already. The SME portfolio came up by 17% year-over-year, and the individual is 47%. I'm talking about revenues. So what people can expect; that exactly the promotional strategy that we have been following. Now the JV, the Bank of Brasil JV is ramping up. HSBC is a new opportunity for Bradesco, definitely will add value later this year. As Mauro just mentioned, all line sales are running OK as the Endo product.

That is also a tremendous innovation, there's a lot of outstanding cash flow. Finally, there will be new premium products at Bradesco actually, they are already there, where the average ticket is way much higher. Therefore, revenues are much stronger. So that's the innovation cycle that we have been pursuing and delivering. Again, very few companies can replicate. We face very little competition, if any, as we innovate. And that's exactly one of the key messages for the Street in 2016.

Operator

Our next question comes of Joseph Giordano, JP Morgan.

Joseph Giordano

I'll move a little bit out of the operating trend and I'll ask a more philosophical question to Mauro. So, Mauro, as you leave the company, what do you believe are the main challenges going forward? And how to deal with all these expertise with Rodrigo and he's generating value in the healthcare chain, so how could he help to bridge all those challenges?

Mauro Figueiredo

I think we have shown to the masses what the results and success of the strategy that has been implementing. And I believe that Rodrigo is the right man to follow on that track, along with new contributions because his previous experience in the financial sector, in the retail sector, actually, beside the financial sector, more recently in Orizon. Orizon is a company involved in process, technology, innovation, in healthcare.

So he knows healthcare through main critic process and intensive use of technology. And he is well known by some of our main stakeholders. But on Bradesco, but to Brasil, and others, and even in other sectors. So he will bring all this experience to add on the track, the present track, of Odontoprev. One thing I think is very important to mention is that, how carefully this has been planned. So it involved very senior people of our controller.

And they have been very careful about selecting the [Indiscernible] of the timing, we discussed a lot. So this is nothing to do with anything more than adding new things and really going on with this very successful strategy that's being implemented. So I'm not the only saying, by saying that I am really confident. Because I know Rodrigo, I know his job; he's done a terrific job and all this expertise will add on this our present and models. Of course, he's going very in-depth with the integration to be more knowledgeable as possible by the Company. That's the reason why he's on board with us. We are starting now, a new road show, Burbank's going to be part of for that in the U.S., in London, in Canada, in Boston and New York in the U.S. And he's coming with us. That's the reason for that is for him to hear from the market.

And also to be able to speak and to really say that this is his opinions and what he's thinking about the future. But I'm really confident that he's the right man for that position from now on. And I'm not really concerned about any deviation, any movement. But we are committed with our strategic planning. And let's remember, the very strong governance that we had in place, everything has been done under the supervision and coordination of all the Board, which is very experienced, board has been through many things throughout the years, when you follow that, our board is composed of five independent members, and four members from our controllers and they all are working together.

And they are being very supportive in this transition phase. And that has been very important. So, I don't see any drawbacks, I really see something going on for the future. I'm pretty confident of that, and we will be able, we are going to be around with sell side, buy side, and he will be able to speak by himself on new concerns about adjusting.

Joseph Giordano

Alright, thank you.

Operator

This concludes today's question and answer session. I would like to invite Mr. Pacheco to proceed with his closing statement. Please, go ahead, sir.

Roberto Borges Pacheco

I would like to take a moment to thank you all for joining us today and looking forward to our featured event. Thank you, bye.

Operator

That does conclude Odontoprev's audio conference for today. Thank you very much for your participation. Have a good day and thank you for using Chorus Call.

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